Bit Digital Makes A Massive Bet On Ethereum

Summary In June 2024, I rated Bit Digital a ‘strong buy’ due to its early and successful pivot to HPC revenue. Missed HPC revenue guidance, and shifting GPU market dynamics, made me less optimistic about long-term prospects later last year. A recent 75 million share offering and questionable capital allocation strategy further cloud the investment outlook, making me cautious on BTBT now. The company wants to spin out its HPC/AI subsidiary WhiteFiber via IPO. I believe shareholders would benefit from such a move. Bit Digital ( BTBT ) is one of the stocks I’ve covered the most for Seeking Alpha in recent years. It’s also one of the few stocks that I have labeled with a ‘strong buy’ tag in the past. That strong buy call came last June and was predicated on the assumption that Bit Digital was a strong buyout candidate in a market that was seeing Bitcoin ( BTC-USD ) mining stocks shift operations to HPC businesses. Bit Digital was one of the first companies to do this and to date is still one of the most successful examples of such a pivot. BTBT Calls (Seeking Alpha) More recently, I’ve soured a bit on the company’s long-term prospects after annualized HPC revenue guidance was missed last year, market dynamics for GPU as-a-service models began to change , and Bit Digital embarked on a capital allocation strategy that I found to be questionable in my most recent piece from March. Subsequent to my March piece, we have another quarter of corporate performance and a recent capital raise to assess. Q1-25 Earnings The quarter ended-March was a fairly transformative one for Bit Digital. Not only did the company see a significant 17.4% reduction in top line revenue year over year, but the company’s revenue from its Digital Asset Mining segment plummeted by 64.5% from Q1-24: Revenue Q1-25 Q1-24 YoY Digital Asset Mining $7,776,963 $21,891,760 -64.5% Cloud Services $14,842,286 $8,069,584 83.9% Colocation Services $1,644,663 $0 ETH Staking $560,641 $325,746 72.1% Other $280,567 $99,748 181.3% Total Revenue $25,105,120 $30,386,838 -17.4% Source: Bit Digital, Form 10-Q In spite of 84% year-over-year growth in revenue from Cloud Services, Bit Digital simply couldn’t overcome the decline from mining to produce a positive year-over-year gain in the top line figure. For context, mining made up just 31% of Bit Digital’s total revenue in Q1-25. That segment accounted for 72% of revenue in Q1-24 and 54% during the full year 2024. The decline in revenue from mining has been well telegraphed for several months. The company even stopped releasing monthly production numbers early in the year. Profit Margin Q1-25 Q1-24 YoY Digital Asset Mining 21.3% 40.7% -47.8% Cloud Services 59.0% 60.9% -3.1% Colocation Services 66.8% ETH Staking 94.2% 95.0% -0.8% Source: Bit Digital, Form 10-Q It certainly isn’t a surprise to see the margin from mining collapse by 48% year over year. Q1-24 was the last full quarter of pre-halving Bitcoin production. CEO Sam Tabar has steadfastly opposed a hash-growth at any cost philosophy, and I think the transformation we’re currently seeing in the company’s business is proof of that. Still, there are concerns going forward. For instance, despite producing 59% gross margins in Q1-25, Bit Digital’s Cloud Service revenue is still well below the $100 million annualized run rate that was expected by the end of last year. Operating income Q1-25 Q1-24 Total Revenue $25,105,120 $30,386,838 Opex Sans Digital Asset Gain/Loss -$28,268,205 -$28,960,381 Operating Income -$3,163,085 $1,426,457 Source: Bit Digital, Form 10-Q – Author’s calculation Essentially, every public Bitcoin miner utilizes FASB accounting rules that allow the companies to show unrealized gains in the digital assets that they hold as income (or losses). Stripping that out from Bit Digital’s report, we can see that the company flipped from positive operating income in Q1-24 to negative in Q1-25. This should be alleviated in the future as Bitcoin mining becomes a less significant driver of both COGS and revenue. That said, the company’s recent capital allocation moves have been substantial. A Massive Wager On Ethereum Prior to releasing Q1 earnings, we already knew that Bit Digital was beginning to position as more of an Ethereum ( ETH-USD ) proxy than a Bitcoin proxy. The company held $91.3 million in ETH and $78.8 million in BTC at the end of January. Two months later, those figures were dramatically different: Digital Assets Quantity Cost Basis Fair Value BTC 417.6 $25,456,846 $34,474,294 ETH 24,434.20 $59,917,193 $44,556,466 Total digital assets held as of March 31, 2025 $85,374,039 $79,030,760 Source: Bit Digital, Form 10-Q At the end of January, ETH had a market value of $3,300 per coin. By the end of March, that price had been nearly cut in half, down to $1,800 per coin. This is what I said at the end of my March BTBT piece: This may be a spicy take, but if I were CEO Sam Tabar, I would completely abandon the ETH staking business entirely. There are two reasons for this. First, ETH has been a total drag on the company’s digital asset value and I laid that out in the section above. That could certainly turn around, but that’s far from a sure thing. The bigger issue is really simple; if Bit Digital can’t rely on capital appreciation from ETH the way it can from BTC, then it would almost certainly be more beneficial for the company to deploy that capital differently. Last summer, the company had sold BTC and swapped it to ETH – that turned out to be a horrific decision with the benefit of hindsight. During Q1-25, the company sold even more BTC and hung on to its ETH. CEO Sam Tabar from the conference call: we also sold approximately $32 million worth of Bitcoin holdings during the quarter to help fund growth while managing our use of equity issuance . We did not sell any ETH during the quarter, but transferred 3,400 into an internally managed fund, which we do not count as treasury holdings. I’ve bolded part of the quote above because I think this is important. Leadership has openly acknowledged the poor optics associated with the size of the company’s ATM relative to the market capitalization of BTBT stock. Given this, I find it strange that Bit Digital opted to raise capital through shareholder dilution to buy even more ETH. Capital Allocation & WhiteFiber IPO On June 26th, Bit Digital announced the pricing of $150 million equity raise at $2 per share for 75 million new shares of BTBT stock. Notably, the company’s stock had closed at $2.35 per share the prior session. Thus, the offering came at a 15% discount to the market value of the stock just one day earlier. After underwriter fees, the company receives $142.5 million, with use of proceeds going toward purchasing ETH. It’s hard for me to view this favorably for three reasons. Bit Digital just sold Digital Assets to fund growth rather than issuing equity, only to turn around just a couple months later and issue equity to buy Digital Assets. It’s a rather striking 180. While the company’s ETH staking is its best business segment by gross margin, the revenue from the segment is by far the smallest of four dis-aggregated business lines. Furthermore, the staking business may not be intense from an opex standpoint, but it does tie up a considerable amount of capital for a very small percentage of top line revenue. This move essentially triples down on a capital allocation strategy that hasn’t been working. Namely, allowing Bit Digital’s equity valuation to be dependent on a risk asset that has weak sentiment and arguably deteriorating fundamentals. All while the company wants to raise through an active ATM. In the prospectus, Bit Digital expressed conviction in the Ethereum ecosystem and specifically mentioned legislation around stablecoins in the US as cause for optimism: Given increased regulatory clarity, including the recently passed GENIUS Act, we view ETH as a digitally native store of value and foundational infrastructure for decentralized applications and stablecoins. Accordingly, we intend to grow our ETH position over time, supported by staking rewards. Looking past the fact that the GENIUS Act has actually not been passed yet by the House of Representatives, I see it as a risky move to further tie the valuation of the company to an asset that Bit Digital can’t ultimately control rather than focusing on raising that capital to fund growth of WhiteFiber. On the latter, it’s very interesting to me that Bit Digital is trying to spin out WhiteFiber. As a wholly owned subsidiary of Bit Digital, WhiteFiber submitted a registration statement with the Securities and Exchange Commission for a proposed IPO. Share count and pricing of such an IPO have yet to be determined. But this would seem to be an attempt to get the same kind of value on its data center business that the market is currently giving companies like Core Scientific ( CORZ ) or IREN Limited ( IREN ) – each of which actually had less HPC/AI revenue than Bit Digital in Q1 yet continue to trade a much larger forward sales multiples than that of BTBT: Data by YCharts To some degree, I suspect the lack of apparent HPC respect for BTBT relative to peers is due to the company having such a large allocation to ETH. For those who would rather see Bit Digital focus capital on scaling cloud services, these ETH purchases are perhaps frustrating. But in the event WhiteFiber does IPO and is successfully spun out of BTBT, holding BTBT is perhaps warranted. Valuation And Assets Per the offering prospectus, there would be an estimated 283.5 million BTBT common shares outstanding following completion of the offering. By my math, that dilutes the current holder base by roughly 36%. And at a $2.19 share close on June 30th, Bit Digital has an implied valuation of $621 million at that 283.5 million shares count. Following the $150 million capital raise, Bit Digital will have about $204 million in ETH, $45 million in BTC, $297 million in non-current assets, and $99 million in combined cash and ‘other current assets’ as of Q1-25. Short of an absolute collapse in the price of Ethereum, stock price downside from here should be somewhat limited, provided the company doesn’t continue to aggressively dilute. Closing Summary I think a WhiteFiber IPO would be a good thing for both Bit Digital and Bit Digital shareholders. It will allow the market to pick between two very different business models currently operated by one parent company. Given the substantial rallies we’ve seen from stocks like CoreWeave, Core Scientific, and IREN Limited on the proposed buyout of Core Scientific by CoreWeave, there’s no reason Bit Digital shouldn’t benefit from spinning out its HPC/AI subsidiary – especially given the segment revenue its doing relative to some of those other stocks mentioned. Having said all of this, I’m a bit concerned about Bit Digital’s Ethereum reliance. Despite being well off its coin price highs, Ethereum is far from cheap on a circulating P/F ratio. A re-rating lower in ETH would severely impact Bit Digital’s stock valuation. I’ll reiterate the ‘hold.’

Source: Seeking Alpha